Could Melkior Resources be the next Lake Shore Gold?

2020 has been a transformational year for Melkior Resources (MKR.V). What started the year off with a consolidation and a falling stock price (low 0.06 – 03/19/2020) ended with two option/JV’s with majors and 12/31/2020 stock price of $0.90, a 10+ bagger for the investors lucky enough to take advantage of the March market turmoil.

However, I feel like this story is just beginning, and many onlookers don’t realize this is the Deluce family offices (MKR Management) second chance at success in the West Timmins Gold Camp. Let’s take this back to 2004 with a company called Holmer Gold Mines to revisit the history of the West Timmins gold camp:

Holmer Gold Mines:

  • Holmer was run by Sethu Raman (CEO), developing the Company’s flagship “Timmins Gold Project.” This Project neighbors Melkior’s Carscallen asset and is now known as the West Timmins Mine owned by Pan American Silver.
  • In May 2003, with an indicated resource of 241,230 Au ounces @ 17.78g/t, Lake Shore Gold entered the scene agreeing to an option agreement to earn 50% consisting of the key metrics of $2.5M in work expenditures and confirming the Project contained an indicated resource of 500,000 ounces.
  • How long did it take them to earn 50%: 1 year and 4 months, 20 months ahead of schedule on their 3-year option.
  • What did they achieve during their 50% earn-in period: they more than tripled the indicated resources to 724,000 ounces at 16.45g/t.
  • What happened next: In Dec 2004, Holmer Gold was bought out by Lake Shore Gold through a business combination.
  • Team: In a Nov 2004 news release, two board members are connected to the current developments:

  • Bernie Deluce is a member of the Deluce Family Office behind Melkior Resources, and Eric Kallio is the Senior Vice President of Exploration for Kirkland Lake Gold, who is overseeing exploration at Carscallen. There is a clear track record of these two groups working together to create shareholder value.
  • Project Similarities:
    1. Before Lake Shore optioning the Timmins Gold Project, most of the drilling done was shallow (<600m), seeing high-grade narrow intersections similar to Carscallen. Once the Lake Shore team took over, most of the gold zones targeted were through 700 – 1,040M holes where the zones really started opening up.
    2. This raises an important question, did Melkior’s last two programs where they encountered their best results to date (23.5 g/t Au over 8.0 meters & 25.7 g/t Gold over 6.0 Meters) scratch the surface of a much larger system at depth similar to West Timmins? Is that why Kirkland Lake rushed into getting involved with the Project at a relatively early stage and with such a large Option/JVs ($110M)? Time will tell, but the two stories definitely have some overlap.

Lake Shore Gold:

  • From acquiring the Timmins Gold Project in Dec 2004, it only took 3 years to commence underground development and 6 years to declare commercial production with 12,300 ounces of gold produced in Dec 2010. Who was vital in navigating the Company through advanced exploration and mine development:
    1. Lake Shore Gold CEO Tony Makuch said, “We have made rapid progress at Timmins Mine, going from commencing advanced exploration to commercial production in roughly three years.”
    2. Tony Makuch joined Lakeshore Gold in 2008, right when things were starting to ramp up. As I am sure you know, Tony is now the CEO & President of Kirkland Lake Gold and is responsible for turning Kirkland into the powerhouse that it is today.
  • Simon Walker provided a great summary of the West Timmins developments, with much of it narrated by Mark Utting, VP Investor Relations (Now SVP Investor Relations at Kirkland Lake Gold).

Keys to Melkior’s Success:

Initial success from Kirkland’s maiden 4,500 meters:

    1. Results from their maiden program are expected to start coming out anytime, which have been delayed from large backups at assay labs.
    2. For those new to the Melkior story, on Sept 29 2020, the Company announced a $110M Option/JV agreement with Kirkland Lake Gold with the following details:
      1. 50% earn-in for $10M in exploration expenditures
      2. If 50% is earned, the structure will convert to a JV whereby Kirkland can acquire an additional 25% for $100M in expenditures.
  • Kirkland acquired 1.25M shares through a PP at $0.80.

The need for growth at Kirkland Lake Gold:

a. Kirkland Lake has been the strongest mid-tier and now approaching major mining company status in terms of growth over the past 5 years. However, what does that growth bring? The need and expectation of more growth. In my view, Kirkland Lake would not get involved in an asset unless they saw a path to production, so this isn’t a discovery hole play to them; this is a 100+ hole play leading to a resource and PEA to add to their production pipeline. What does this mean? This means upon initial success from their maiden program that they may bring in multiple drills and materially increase the drill programs’ size to drill out a system with a current potential strike length of 800 meters and open in each direction.

b. The Carscallen Project has the following traits that make it a natural fit to Kirkland’s portfolio:

i. High-grade narrow vein structure (so far) similar to Macassa

ii. Tony Makuch and team developed the neighboring West Timmins Mine from exploration stage to production

iii. Carscallen is 20km south-east of Kirkland’s recently announced regional office

iv. There could be a larger Timmins play developing for Kirkland Lake with the August 2020 announcement of a “strategic alliance” facilitating exploration opportunities within Newmont’s Timmins properties with “Kirkland Lake taking on the role of manager of strategic alliance activities in the partnership”.

Melkior’s Tight Share Structure and Alignment of Management:

a) Melkior currently has 20.3M shares with a current stock price of $0.87 (Jan 8th) and a $17.6M market cap. Management holds 30% of the float with 6% held by Kirkland Lake, and the majority of the option/warrants outstanding held by either Management or Kirkland. Followers have the rare opportunity to evaluate a stock near the same levels a major invested at (0.80 for $1M).

b) Management is completely aligned with shareholders through their 30% shareholdings and having one of the lowest G&A burns in the industry, vastly different than many of their “lifestyle” competitors.

They have protected the interests of small shareholders, with the forefront example being when the Company consolidated in February 2020. Once consolidated, they immediately went into a drill program to give their existing shareholder base a chance at discovery before financing. 

  1. Melkior has a $4M option with Barrick Gold at it’s White Lake Project as a bonus along with two additional exploration plays in Quebec.

Key Questions:

  1. If Kirkland has success in their initial $3M minimum commitment and earns 50% for $10 million, do we see a Kirkland/Melkior JV, or does Kirkland scoop up Melkior before moving forward?
  2. A $10M budget could see 80,000+ meters drilling; what size of resource could they have at the end of that?
  3. In addition to the high-grade gold system, does further drilling continue to add support to the potential VMS environment uncovered in the March 2020 drilling?

Conclusion:

The situation we are in as followers of Melkior is like holding 6 of 7 winning lottery numbers with the obvious million-dollar question being, will the seventh number drop? Time will tell, but the results out of Kirkland’s maiden 4,500m will be the start of the tale.

While the industry has gone through a correction since August, Melkior has traded in a tight range, with the floor seemed to be set by the $1M private placement done by Kirkland Lake at $0.80 per share.

Melkior Resources Inc

(TSXV:MKR) (OTC:MKRIF)

20.3M Shares Outstanding

$17.6M market cap (Jan 8th)

Website


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